The financial crisis of 2007-10 was triggered by a liquidity crisis in the United States banking system. It has resulted in the collapse of large financial institutions, the bailout of banks by national governments and downturns in stock markets around the world. It is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. It contributed to the failure of key businesses, declines in consumer wealth estimated in the trillions of U.S. dollars, substantial financial commitments incurred by governments, and a significant decline in economic activity.
The severe economic downturn led to widespread calls for changes in the regulatory system. On June 17, 2009 President Barack Obama introduced a proposal for "sweeping overhaul of the financial regulatory system, a transformation on a scale not seen since the reforms that followed the Great Depression." The full proposal is 89 pages long. In December, Democrats in the House passed a bill largely along those lines. In the Senate, the bill stalled during bipartisan negotiations. Last week, the Administration and Senate Democrats sought to make what they said was a compelling case for financial reform of banking regulation and financial markets. The Restoring American Financial Stability Act of 2010, sponsored by Senator Christopher J. Dodd (D-CT), introduced in March after months of development, appears to be positioned for approval even though no Republicans support the current version. It encompasses such diverse matters as changes in consumer finance regulation, a special council of regulators to impose new prudent risk standards on systemically significant financial institutions, and new rules for hedge funds and derivatives. The debate below will focus on whether or not the US Congress should adopt financial reform legislation.
Free market does not give free license to greed. President Obama: "A free market was never meant to be a free license to take whatever you can get, however you can get it. That is what happened too often in the years leading up to the crisis. Some on Wall Street forgot that behind every dollar traded or leveraged, there is family looking to buy a house, pay for an education, open a business, or save for retirement. What happens here has real consequences across our country."
2010 reform expands "shock-absorbers" for nex financial crisisTimothy Geitner. "Financial reform with teeth." The Washington Post. April 13, 2010: "Ending 'too big to fail' also requires building stronger shock absorbers throughout the system so it can better withstand the next financial storm. To do that, the Senate bill closes loopholes and opportunities for arbitrage, and it brings key markets, such as those for derivatives, out of the shadows. [...] Transparency will lower costs for users of derivatives, such as industrial or agriculture companies, allowing them to more effectively manage their risk. It will enable regulators to more effectively monitor risks of all significant derivatives players and financial institutions, and prevent fraud, manipulation and abuse. And by bringing standardized derivatives into central clearing houses and trading facilities, the Senate bill would reduce the risk that the derivatives market will again threaten the entire financial system."
Financial reform puts onerous regulations on free markets. One New Yorker said to New York 1 news: "I don't feel very well about it. I think that we're a free enterprise country and I don't like too many rules and regulations that they are trying to impose on Wall Street."
New reforms make regulations equally complex and vulnerable.David C. John. "Dodd Financial Regulation Bill: Super Regulators Not the Answer". The Heritage Foundation. May 2010: "It is hard to see what if any benefits would come from this wholesale rearrangement of responsibilities. Since most major holding companies still contain subsidiaries that would be regulated by the SEC, Commodity Futures Trading Commission, or another regulator, the overall financial regulatory system would remain about as complex as it is now. Gaps that remain in the existing system would continue to exist, so there would be little benefit to thousands of financial institutions shifting to new regulators that may interpret existing rules differently from their existing overseers."
2010 US financial regs will likely reduce lending/growth."Can the Senate finance bill curb Wall Street?". Kansas City Star. May 2010: "This is a complex issue that could have unintended consequences on job growth, the ability of Americans and business owners to access credit, and the United States’ role as a worldwide leader in innovation and capital formation. The consequences of this bill will reverberate across our economy for years to come."
2010 financial reform protects big banks, harms smallest. Republican Leader John Boehner (R-Ohio) said Democratic proposals would "protect the biggest banks in America and harm the smallest banks" and make it harder for community banks to make loans to small businesses.
2010 financial reform offers important consumer protection"Jim Webb: The case for financial reform." August Free Press (Virginia). May 12, 2010: "Consumer protection. Abusive lending practices have proliferated in recent years, with little oversight or regulation. I am a cosponsor of two amendments that would crack down on outrageous credit card rates, by allowing states to regulate interest rates within their own borders—as they could prior to 1978—and by capping the maximum allowable rate at 15%. I also voted to preserve a strong, independent consumer protection agency that will have the ability to conduct meaningful oversight, while exempting smaller banks and other businesses from potentially onerous regulations."
Banks shouldn't blame borrowers for taking risks"Why Consumers Need Financial Reform." Money Watch. April 2010: "What angers me most about Wall Street’s shady dealing and greed is that that they like to blame the national meltdown on their customers. You’ve heard their sniffy defense: People took mortgages they couldn’t afford, lied to lenders about their incomes, and deserve whatever they got. The poor little ole mortgage bankers and investors were the innocent victims of shocking consumer misbehavior. The banks had no idea — absolutely none — that when the scheduled interest rate ratcheted up on subprime loans, borrowers might not be able to pay."
2010 financial reform exposes sensitive information"Big Brother loves 'financial reform'" Washington Times. April 30th, 2010: "The legislation, sponsored by Senate banking committee Chairman Christopher J. Dodd, would create the innocuously named Office of Financial Research as a central repository for transaction-related records held by financial companies. According to proponents, "decision-makers" like Mr. Geithner need up-to-the-minute information to act in order to prevent what they refer to as another Wall Street meltdown. The proposed agency would also provide statistical analysis and research, purportedly to monitor systemic risk to the financial system. [...] the details of the proposal show that this new agency's mission is not meant to be limited to improving the quality of financial data. Mr. Dodd's legislation would grant the agency director the coercive power of subpoena to obtain records and rulemaking authority to force private-sector firms to maintain their internal financial records in a format acceptable to the government. The legislation also grants sweeping authority to maintain a data center that would collect and maintain 'all data necessary' to carry out the director's wishes. Needless to say, the government's history of losing hard drives and laptops filled with sensitive information suggests entrusting more to a federal agency is not a smart idea."
Financial reform constrains executive compensation"Jim Webb: The case for financial reform." August Free Press (Virginia). May 12, 2010: "Executive compensation. I introduced my Taxpayer Fairness Act as an amendment to the bill. My amendment would give American taxpayers an upside in the recovery of our economic system, which became possible only because their tax dollars saved it. It puts a one-time windfall tax on bonuses paid in 2010 to executives of the thirteen financial institutions that received $5 billion or more of taxpayer support under TARP or the Housing and Economic Recovery Act of 2008 (Fannie Mae and Freddie Mac). This one-time, 50 percent excise tax on bonuses above $400,000 would raise, at a minimum, an estimated $3.5 billion. Nothing is more fair or appropriate than to make American taxpayers whole after they infused our financial system with capital necessary for its recovery."